"^   HE 

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LIBRARY 

OF  THE 

University  of  California. 

GIFT    OF 

l^-xr^,. D.c^^^^dtt 

'       Class^  ^^ 

THE 

CONSTRUCTION  OF  FREIGHT  RATES 

IN  THE  SOUTH. 


LECTURE  DELIVERED  BEFORE  THE  STUDENTS  OF 

THE  GRADUATE  SCHOOL  OF  BUSINESS 

ADMINISTRATION,  HARVARD 

UNIVERSITY. 

-J, 


Mr.  J.  M.  GULP, 
Vice-President,  Southern  Railway  Company. 


CAMBRIDGE,   MASS 
January  29th,  1909. 


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THE  CONSTRUCTION  OF  FREIGHT  RATES  IN  THE  SOUTH. 


It  is  a  well  recognized  principle  of  economics  that  prices  of 
all  kinds,  including  not  only  commodity  prices,  but  the  compen- 
sation of  laborers,  professional  men,  and  those  who  work  in 
every  field  of  human  activity,  are  regulated,  to  a  greater  or 
less  degree,  by  economic  forces  beyond  the  control  of  the  seller. 
They  are  subject  to  the  law  of  supply  and  demand  and  to  the 
competition  of  those  offering  for  sale  like  commodities  or  like 
services. 

It  seems  to  be  believed  by  many  that  charges  for  transporta- 
tion are  an  exception  to  this  rule,  and  that,  except  in  so  far  as 
they  are  regulated  by  public  authority  they  can  be  fixed  at  any 
level  desired  by  the  carrier.  Every  man  who  has  had  practical 
experience  in  the  transportation  business,  and  especially  in  the 
department  having  to  do  with  the  fixing  of  rates,  knows  that 
this  is  not  true.  If  it  were  otherwise,  all  common  carriers 
would  prosper  and  such  a  thing  as  a  bankrupt  railway  would 
be  unknown. 

As  it  is,  every  traffic  official  knows  that  on  every  hand  he  is 
confronted  by  the  working  of  economic  forces  which  are  as 
inexorable  as  is  the  law  of  gravitation,  and  that  the  limit  within 
which  he  can  exercise  discretion  in  the  fixing  of  any  rate  is 
very  narrow.  On  the  one  hand  he  has  the  proper  desire  to 
perform  his  duty  of  so  adjusting  his  charges  that  in  the  aggre- 
gate they  will  yield  sufficient  gross  earnings  to  pay  operating 
expenses,  taxes,  and  fixed  charges,  and  a  fair  margin  of  profit 
for  the  owners  of  the  property.  On  the  other  hand  his  discre- 
tion is  limited  by  the  fact  that,  if  his  company  is  to  prosper,  its 
charges  must  be  such  as  to  attract  traffic  and  encourage  the 
development  of  resources  and  the  location  of  industries  along 
its  lines.  It  is  his  aim  so  to  adjust  rates  that  they  will  yield 
the  necessary  revenue  to  the  road,  but  will  at  the  same  time 
enable  producers  along  his  line  to  sell  their  products  under 
competitive  conditions  on  such  terms  as  will  permit  them  to 
extend  their  production,  and  as  will  attract  other  producers 
to  his  territory.    In  his  effort  to  keep  rates  up  to  a  net-revenue- 


197972 


producing  level  he  is  confronted  by  exceedingly  complex  con- 
ditions. These  may  be  grouped  under  four  heads:  The  com- 
petition of  other  carriers  by  land  and  by  water,  the  competition 
of  rival  markets,  the  competition  of  rival  producing  localities, 
and  the  competition  of  commodities  which  may  be  put  to  like 
uses. 

As  an  example  of  the  competition  of  carriers  I  may  cite  the 
rates  from  Chicago  to  New  York,  where  the  all-rail  lines  come 
into  competition,  not  only  with  each  other,  but  also  with  the 
all-water  route  by  way  of  the  lakes  and  the  Erie  Canal,  and 
with  the  water  and  rail  route  by  way  of  the  lakes  to  Buffalo, 
and  thence  by  rail  to  New  York.  The  cost  of  transportation 
by  water  being  cheaper  than  by  rail,  the  all-water  route  con- 
trols the  charges  from  Chicago  to  New  York  on  all  except 
perishable  commodities  or  such  traffic  as  requires  such  dispatch 
as  the  water  routes  cannot  furnish.  I  shall  show,  in  due 
course,  the  far-reaching  effect  of  the  water  route  between 
Chicago  and  New  York  in  controlling  rates  between  the  West 
and  inland  points  as  far  south  as  the  Carolinas,  and  even  Geor- 
gia, and  as  controlling  export  rates  not  only  to  all  North 
Atlantic  ports,  but  down  the  coast  as  far  as  Charleston,  and 
from  the  interior  to  the  Gulf  ports  as  well. 

Competition  of  rival  markets  may  be  illustrated  by  the  rates 
from  Chicago  to  the  Ohio  River  cities  of  Cincmnati,  Louis- 
ville, New  Albany,  Evansville,  and  Cairo.  These  are  reached 
by  different  lines  of  roads,  each  interested  in  securing  a  fair 
amount  of  traffic  to  the  river  city  which  it  serves,  with  the 
result  that  difference  in  distance  has  been  ignored  and  the 
rates  to  these  river  cities  made  on  practically  the  same  level. 

This  competition  of  rival  markets  is  one  of  the  factors  in 
the  very  complicated  competitive  conditions  which  control  the 
relative  adjustment  of  rates  from  Ohio  River  points  to  rival 
markets,  such  as  Atlanta  and  Augusta,  to  which  rates  from 
Ohio  River  points  are  relatively  adjusted  and  practically  the 
same.  This  condition  is  more  forcefully  illustrated  by  the 
adjustment  of  rates  from  Cincinnati,  Louisville,  and  other  Ohio 
River  points,  to  New  Orleans,  La.,  and  Mobile,  Ala.  Origi- 
nally the  rates  to  Mobile  were  higher  than  to  New  Orleans, 
but  both  points  being  Gulf  ports  serving  a  common  territory, 


it  became  necessary  for  the  Mobile  lines  to  make  the  rates 
from  the  Ohio  River  crossings  not  higher  than  to  New  Orleans 
in  order  that  Mobile  might  compete  with  New  Orleans,  and 
also  in  order  that  the  western  producing  points  might  meet  at 
Mobile  the  competition  resulting  from  all-water  transportation 
from  eastern  points,  the  water  rates  from  the  East  to  New 
Orleans  and  Mobile  being  practically  the  same  to  both  points. 

This  adjustment  was  also  made  necessary  to  place  the  rail 
lines  in  a  position  to  successfully  compete  for  the  Mobile  trade 
as  against  actual  or  potential  competition  via  river  to  New 
Orleans  and  water  thence  or  even  via  rail  to  New  Orleans 
and  thence  by  water. 

Competition  of  rival  producing  localities  may  be  illustrated 
by  the  rates  on  cotton  goods  from  the  New  England  mills  and 
from  the  Southern  mills  to  Chicago  and  other  Western  mar- 
kets. With  the  development  of  the  cotton  mill  industry  of  the 
South,  the  roads  leading  from  that  section  were  under  the 
necessity  of  putting  in  such  rates  as  would  enable  Southern 
mills  to  compete  for  this  Western  trade,  and  they  did  so.  It 
is  interesting  to  observe  that  in  the  determination  of  the  rate 
on  the  manufactures  of  the  South  that  would  enable  the  South 
to  sell  in  Western  markets  in  competition  with  the  other  sec- 
tions not  served  by  the  roads  of  the  South,  rates  were  adjusted 
with  the  single  view  of  the  competition  to  be  met. 

Competition  of  similar  commodities  may  be  illustrated  by 
the  necessity  which  a  road  from  a  coal-producing  locality  is 
mider  of  making  rates  which  will  enable  its  coal  to  meet  the 
competition  of  wood  from  another  locality  abounding  in  tim- 
ber, or  by  the  rates  which  enable  marble  from  one  locality  to 
compete  as  a  building  material  with  granite  from  another 
locality,  or  by  rates  on  marble  or  granite  from  distant  quarries 
to  enable  competition  with  brick  produced  by  local  or  near-by 
kilns,  and  frequently  by  rates  on  paving  brick  or  paving  com- 
position to  enable  competition  with  macadam,  crushed  stone, 
or  gravel. 

In  addition  to  the  natural  or  normal  effect  of  these  competi- 
tive forces  upon  rates,  frequent  rate  wars,  arbitrations,  and 
litigation  have  been  working  to  bring  about  a  better  economic 
relation  of  rates,  with  the  tendency  to  a  lower  average  level. 


The  limits  within  which  discretion  can  be  exercised  in  the 
making  of  rates  are  fixed  by  three  principles.  The  first  is  that 
a  charge  for  transportation  cannot  exceed  the  value  of  the 
service  to  the  shipper;  if  it  does,  the  traffic  will  not  move. 
The  second  is  that  no  charge  for  transportation  can  properly 
be  less  than  the  cost  to  the  carrier  of  performing  that  particular 
service.  The  third  is  of  equal  importance  in  that  it  requires 
the  proper  correlation ;  that  is  to  say,  a  given  rate  should  bear 
a  proper  relation  to  other  rates  on  the  same  or  competing  com- 
modities, in  the  same  territory.  Within  these  limits  the  entire 
schedule  of  rates  should  be  so  adjusted  as  to  yield  a  margin 
over  the  costs  of  operation  approximately  equal  to  the  rate 
of  profit  earned  by  investments  in  other  lines  of  business. 
Unless  such  a  margin  can  be  earned  the  provision  of  additional 
and  improved  rail  facilities  requiring  the  investment  of  new 
capital  must  be  affected,  for  it  is  an  invariable  economic  law 
that  capital  is  attracted  to  those  enterprises  promising  the 
safety  of  the  principal  involved,  together  with  a  reasonable 
assurance  of  a  rate  of  profit  commensurate  with  what  might 
be  earned  if  it  were  put  to  other  uses. 

If  all  classes  of  traffic  between  all  points  could  pay  a  uniform 
rate  per  mile  the  problem  of  rate-making  would  be  very  simple. 
It  is  obvious,  however,  that  there  is  a  wide  difference  between 
the  value  of  transporting  a  carload  of  coal  and  a  carload  of 
silk  goods,  and  that  if  rates  on  all  traffic  should  be  fixed  at  the 
rate  on  silk  goods  very  little  coal  would  move,  while  if  all 
traffic  should  be  carried  at  the  rate  on  coal  the  railways  w^ould 
be  bankrupt.  It  is  to  the  interest  of  society  generally  that  coal 
should  move  as  well  as  silk  goods,  and  the  carrier  is,  therefore, 
justified  in  hauling  coal  at  a  rate  that  pays,  in  addition  to  the 
movement  expenses  on  that  particular  traffic,  revenue  contribu- 
ting relatively  less  to  the  payment  of  general  expenses.  To 
whatever  degree  this  low-class  traffic  contributes  to  general 
expenses  over  the  movement  expenses  of  that  particular  traffic, 
it  reduces  the  amount  that  must  be  obtained  from  the  higher- 
class  traffic  capable  of  bearing  a  higher  rate.  The  same  prin- 
ciple governs  competitive  rates  and  non-competitive  rates.  The 
carrier  may  properly  accept  rates  on  highly  competitive  traffic, 
when  necessary  to  secure  a  share  of  such  traffic,  that  would 


be  ruinous  to  the  carrier  if  applied  to  all  its  traffic,  even  though 
such  rates,  after  the  expense  of  moving  such  competitive 
traffic,  yield  relatively  a  smaller  margin  to  be  applied  to 
general  expenses.  The  non-competitive  point  does  not  suffer 
from  this,  but  benefits  to  the  extent  that  the  competitive  traffic 
contributes  to  general  expenses,  and  it  also  benefits  by  the  fact 
that  its  rates  cannot  exceed  the  rates  to  the  competitive  point 
plus  the  local  rate  from  that  point,  and  that  where  its  standard 
rates  are  in  excess  of  this  combination,  the  rate  to  the  non-com- 
petitive point  must  be  reduced. 

While  it  is  inevitable  that  in  the  vast  number  of  railway 
rates  between  all  the  stations  in  the  United  States  there  should 
be  some  cases  of  unjust  relation,  it  can  be  said  of  the  rates  as 
a  whole  that  differences  which  on  their  face  may  seem  to  be 
arbitrary  and  unjust,  if  analyzed,  will  be  found  to  be  the  logical 
and  inevitable  result  of  the  working  of  the  competitive  forces 
to  which  I  have  referred.  All  of  these  forces  play  a  part  in 
controlling  rates  in  the  section  of  the  country  which  we  now 
have  especially  under  discussion. 

The  freight-rate  structure  of  the  South  as  it  exists  today  is 
the  result  of  a  natural  and  inevitable  evolution  growing  out 
of  the  physical  geography  of  the  section  and  the  operation  of 
the  com.petitive  forces  to  which  I  have  referred.  A  distin- 
guishing characteristic  is  what  is  known  as  the  basing-point 
system.  This  is  a  system  by  which  through  rates  to  certain 
points  are  the  basis  for  rates  to  other  points — the  through  rates 
to  a  point  which  is  not  a  basing  point  being  a  combination  of 
the  rate  to  the  nearest  basing  point  plus  the  rate  from  the 
basing  point  to  the  point  to  which  the  through  rate  is  made,  or 
plus  a  differential  over  this  rate  to  the  basing  point.  This  re- 
sults, in  many  cases,  in  a  lower  rate  for  a  long  haul  than  for  a 
shorter  haul,  when  the  shorter  distance  is  included  in  the  longer. 
It  has  given  rise  to  some  criticism  and  litigation  on  account  of 
the  alleged  discriminations  involved.  We  shall  see,  however, 
that  the  basing  points  have  not  been  established  by  the  rail- 
ways arbitrarily,  or  even  voluntarily,  and  that  their  abolition 
would  involve  a  commercial  upheaval  in  the  Southeastern 
States  that  would  bankrupt  its  carriers  and  give  a  serious  set- 
back to  the  development  of  the  entire  section. 


First  among  the  factors  that  have  influenced  rate  evolution 
in  the  Southeastern  States  must  be  placed  the  physical  geog- 
raphy of  the  section  and  the  consequent  influence  of  water 
transportation — the  eastern  and  southern  boundaries  of  this 
section  are  the  Atlantic  Ocean  and  the  Gulf  of  Mexico.  Its 
western  boundary  is  the  Mississippi  River.  On  the  north, 
from  the  Atlantic  Ocean  to  Cairo,  it  is  bounded  by  the  Ohio 
and  the  Potomac  Rivers.  Numerous  streams,  navigable  across 
the  coastal  plains  to  the  foothills,  flow  into  the  Atlantic  and 
the  Gulf.  Tributaries  of  the  Ohio  and  the  Mississippi  are  navi- 
gable for  long  distances  in  the  western  and  northwestern  parts 
of  the  section.  It  differs  from  the  territory  west  of  the  Missis- 
sippi River  in  that,  owing  largely  to  its  facilities  of  water 
transportation  and  to  the  world  demand  for  its  characteristic 
products — cotton  and  tobacco — it  was  comparatively  well  set- 
tled, and  had  a  considerable  commerce  before  the  era  of  rail- 
way construction.  When  the  railways  were  built  they  found 
certain  commercial  and  transportation  conditions  already  well 
established.  They  were  powerless  to  disregard  those  condi- 
tions, and  it  was  well  for  the  best  interests  of  the  entire  section 
that  they  were. 

As  a  result  of  the  conditions  which  existed  prior  to  the  build- 
ing of  the  railways  and  of  subsequent  developments,  there  are 
several  classes  of  basing  points  in  the  South.  First,  there  are 
the  seaports  from  Norfolk  to  New  Orleans.  Through  these 
ports  the  products  of  the  interior  Southeast  were  shipped,  and 
from  them  the  products  of  other  countries  and  of  the  North- 
eastern States  were  distributed  to  the  interior  South.  Then 
came  the  development  of  distributing  centers  along  the  Ohio 
and  Mississippi  from  Cincinnati  to  New  Orleans,  and  of  a 
secondary  series  of  distributing  points  at  the  head  of  naviga- 
tion, or  at  the  fall  line  of  the  principal  rivers  flowing  into  the 
Atlantic  and  the  Gulf.  As  examples  of  these  interior  trade 
centers  at  the  head  of  navigation  I  may  mention  Richmond, 
Va. ;  Columbia,  S.  C. ;  Augusta,  Macon,  Columbus,  Ga.,  and 
Montgomery,  Ala.,  all  of  which  and  others  were  in  existence 
before  the  building  of  the  railways,  and  were  points  at  which 
the  products  of  the  surrounding  territory  were  collected  and 
from  which  goods  were  distributed  by  wagon  or  pack  animals. 


When  the  railways  were  built  they  found  these  trade  centers 
already  in  existence,  and  they  simply  accepted  the  situation  as 
they  found  it,  and  adjusted  their  business  to  existing  and  con- 
trolling trade  conditions.  Still  another  class  of  trade  centers 
or  basing  points  grew  up  with  the  development  of  the  railway 
system.  These  were  at  gateways,  such  as  Atlanta,  and  at 
strategic  railway  centers,  such  as  Birmingham,  where  intensive 
railway  competition  without  water  transportation  had  the  effect 
of  creating  distributing  points.  When  the  roads  were  first 
built  there  were  few,  if  any,  towns  of  any  importance  on  their 
lines  except  these  trade  centers  that  had  already  become  estab- 
lished. The  only  practicable  means  of  distribution  was  to  ship 
to  these  centers  as  distributing  points. 

As  other  towns  at  railway  junctions  have  grown  in  commer- 
cial importance,  there  has  been  brought  about,  in  some  cases, 
a  readjustment  of  their  rates  to  a  level  between  those  of  the 
purely  local  points  and  those  of  the  more  highly  competitive 
points;  in  fact,  in  a  few  instances  the  readjustment  has  been 
on  the  basis  of  highly  competitive  adjacent  points. 

Economic  conditions  in  the  South  aided  in  the  perpetuation 
of  this  system.  It  was  essentially  an  agricultural  region,  prac- 
tically without  industrial  centers,  and  consequently  without  a 
large  percentage  of  urban  population.  The  system  by  which 
planters  bought  their  supplies  in  bulk  to  be  issued  to  their 
labor,  and  the  practice  which  early  grew  up  of  merchants  giv- 
ing credit  to  planters  until  their  crops  were  marketed,  also 
tended  to  concentrate  trade  in  the  hands  of  dealers  at  the 
larger  and  financially  stronger  centers. 

If  we  are  clearly  to  understand  the  relation  of  the  basing- 
point  rates  to  those  to  and  from  other  points  and  the  economic 
necessity  for  the  differences  that  exist,  we  must  consider  first 
how  the  basing-point  rates  are  made.  We  will  find  that  actual 
or  potential  water  competition  is  the  most  important  controll- 
ing factor. 

On  account  of  its  long  coast  line  and  its  numerous  rivers 
there  is  scarcely  a  locality  in  the  South  the  rates  to  which  from 
other  sections  do  not  feel  the  influence  of  water  rates  to  a 
greater  or  less  degree.  This  influence,  exerted  either  directly 
or  indirectly,  at  times  produces  results  that  are  surprising  to 


those  who  have  not  studied  the  matter  closely.  It  is  very  ap- 
parent, of  course,  that  rail  rates  between  the  cities  on  the 
Atlantic  and  Gulf  coasts  are  controlled  by  the  water  rates,  and 
that  the  rail  lines  can  secure  on  this  traffic  only  what  the  trans- 
portation is  worth,  which  is  not  in  excess  of  what  the  water 
lines  will  accept  for  the  service,  plus  the  value  to  the  shipper 
or  consignee  of  prompt  transportation  and  the  absence  of  ma- 
rine risk.  It  is  equally  evident  that  rail  rates  between  points 
on  the  Mississippi  River  and  its  tributaries  are  controlled  in 
the  same  way  by  actual  or  potential  steamboat  competition. 

Going  a  step  farther,  we  find  that  rail  rates  between  the 
North  Atlantic  ports  and  the  towns  at  the  head  of  navigation 
on  the  Southern  rivers  are  controlled  by  the  ocean  rates  to  the 
ports  at  the  mouths  of  these  rivers,  plus  the  steamboat  rates 
up  the  rivers.  An  example  of  this  is  the  rail  rate  from  New 
York  to  Augusta,  which  is  controlled  by  the  ocean  rate  from 
New  York  to  Savannah,  plus  the  river  rate  from  Savannah 
to  Augusta.  Rates  between  river  points  are  controlled  in  the 
same  way,  as  is  illustrated  by  the  rates  between  St.  Louis  and 
Memphis  and  New  Orleans,  also  between  Savannah  and  Au- 
gusta, which  are  controlled  by  the  steamboats'  rates. 

The  influence  of  all-water  rates  on  all-rail  rates  is  very  ap- 
parent. This  matter  becomes  more  complicated  when  we  take 
up  combinations  of  water  and  rail  rates  and  trace  their  influ- 
ence through  their  various  ramifications.  We  may  have  water 
rates  combined  with  rail  rates  at  one  or  both  ends,  with  a  result 
that  they  control  the  all-rail  rates  between  the  points  involved. 
As  an  example  of  the  simplest  form  of  water  and  rail  rates, 
we  may  take  the  rates  from  the  North  Atlantic  ports  by  water 
to  the  South  Atlantic  ports  and  thence  by  rail  to  an  inland 
point,  such  as  Atlanta.  Here  the  combined  water  and  rail  rate 
controls  the  all-rail  rate.  It  is  easy  to  see  that  this  must  be 
so,  but  it  is  not  so  apparent  that  rates  by  the  Atlantic  Ocean 
exert  an  influence  on  traffic  as  far  inland  as  that  moving  be- 
tween Cincinnati,  Chicago,  and  St.  Louis,  and  points  in  the 
Southeast,  yet  such  is  the  case.  Here  we  have  an  illustration 
of  the  competition  of  rival  producing  or  selling  localities.  The 
merchants  of  these  middle  Western  cities  are  competitors  in 
the  Southeastern  section  with  the  merchants  of  Boston,  New 


York,  Philadelphia,  and  Baltimore.  The  merchants  of  the 
Northeastern  cities  have  the  advantage  of  rates  controlled  by 
the  Atlantic  Ocean,  and  if  the  merchants  of  the  middle  West- 
ern cities  are  to  meet  them  in  these  common  markets,  the  influ- 
ence of  the  ocean  rates  must  be  recognized  in  the  rates  from 
the  Western  cities.  It  was  largely  this  competition  between 
the  East  and  the  West  which  resulted  in  Atlanta  being  made 
a  basing  point. 

To  a  certain  extent  the  possibility  of  the  middle  Western 
merchant  taking  advantage  of  the  ocean  rates  himself  must 
be  taken  into  account.  To  a  large  extent  Pittsburg,  Chicago, 
etc.,  have  for  years  at  times  shipped  via  Eastern  ports  to  South- 
eastern points.  An  extreme  illustration  of  this  competition  is 
found  in  the  rail  rate  from  Cincinnati  to  Augusta,  Ga.,  which 
is  influenced  to  some  extent  by  the  ability  of  the  Cincinnati 
merchant  to  ship  to  Baltimore  by  rail,  thence  by  ocean  to  Sa- 
vannah, and  by  river  to  Augusta.  Partly  as  a  result  of  this 
and  partly  as  a  result  of  the  influence  of  the  all-water  rates 
to  Augusta  from  Eastern  cities,  the  rail  rates  from  Cincinnati 
and  other  Western  points  to  Atlanta  and  Augusta  are,  as  pre- 
viously stated,  relatively  adjusted,  rates  to  Augusta  being  only 
slightly  higher,  although  the  route  to  Augusta  through  Atlanta 
is  171  miles  longer  than  to  Atlanta.  That  this  low  combination 
of  rail  and  water  rates  from  the  West  to  Augusta  is  possible 
is  due  to  the  fact  that  the  rail  routes  from  Cincinnati  and  other 
Western  points  to  Eastern  ports,  with  their  dense  traffic  and 
subject  to  the  influence  of  the  lake  and  canal  route  on  rates 
to  all  the  trunk  line  ports,  are  able  to  make  relatively  low  rates 
as  measured  by  distance.  Here  we  have  the  influence  of  the 
lakes  shown  as  far  south  as  Augusta. 

As  is  well  known,  rates  from  all  points  north  of  the  Ohio 
and  East  of  the  Mississippi  to  the  ports  of  Boston,  New  York, 
Philadelphia,  Baltimore,  Norfolk,  and  Newport  News  are 
based  on  the  rates  from  Chicago  to  New  York,  which,  as  we 
have  seen,  are  controlled  by  the  lakes  and  the  Erie  Canal. 
But  ports  south  of  Norfolk  wish  to  do  an  export  business, 
and  Mobile  and  New  Orleans  are  active  competitors  with  the 
North  Atlantic  ports  for  the  export  grain  business  of  the 


10 

West.  As  they  have  a  longer  ocean  voyage  to  the  European 
ports,  it  is  necessary  for  the  roads  serving  them  to  make  rates 
even  below  the  rates  to  the  North  Atlantic  ports.  Favored 
by  a  prevailing  down  grade  and  no  mountain  barriers,  they 
have  been  able  to  do  this.  Mr.  James  J.  Hill  expressed  this 
advantage  of  the  gulf  ports  very  graphically  when  he  said,  on 
one  occasion,  **You  can  kick  a  barrel  of  flour  at  Minneapolis 
and  it  will  roll  to  New  Orleans." 

The  trunk  line  rates  to  the  North  Atlantic  ports  have  an 
absolutely  controlling  influence  on  what  is  one  of  the  most 
difficult  rate  situations  in  the  Southeastern  States.  That  is  the 
relation  of  rates  from  the  West  and  to  a  certain  extent  from 
the  South  to  the  Virginia  cities,  embracing  Lynchburg,  Rich- 
mond, and  Norfolk,  as  compared  with  rates  from  the  West 
and  South  to  points  south  of  Lynchburg  as  far  as  northern 
South  Carolina. 

Section  4  of  the  Interstate  Commerce  Law  provides  that 
"It  shall  be  unlawful  for  any  common  carrier  subject  to  the 
provisions  of  this  act  to  charge  or  receive  any  greater  compen- 
sation in  the  aggregate  for  the  transportation  of  passengers 
or  of  like  kind  of  property,  under  substantially  similar  circum- 
stances and  conditions,  for  a  shorter  than  for  a  longer  distance 
over  the  same  line,  in  the  same  direction,  the  shorter  being 
included  within  the  longer  distance."  In  advance  of  its  inter- 
pretation by  the  courts  there  were  radical  differences  of  opinion 
as  to  the  proper  construction  of  this  provision.  The  railways 
in  that  territory  east  of  the  Mississippi,  north  of  the  Ohio  and 
Potomac  rivers,  commonly  known  as  Central  Freight  Associ- 
ation and  Trunk  Line  Territory,  construed  it  as  prohibiting 
practically  all  higher  charges  for  a  shorter  than  for  a  longer 
distance,  when  the  shorter  distance  was  included  in  the  longer. 
It  followed,  therefore,  that  wherever  in  Trunk  Line  territory 
or  Central  Traffic  Association  territory  higher  rates  for  the 
shorter  intermediate  hauls  had  been  charged  than  for  the  longer 
hauls,  the  rates  were  so  readjusted  that  the  rate  for  the  shorter 
intermediate  haul  did  not  exceed  the  rate  for  the  longer  haul. 
In  the  West  it  resulted  in  blanket  rates  covering  large  areas. 
The  adoption  of  this  system  in  the  South  would  have  over- 


turned  existing  commercial  conditions,  and  would  have  been 
ruinous  alike  to  prosperous  communities  and  to  railways. 

With  a  few  exceptions  the  Southern  roads  construed  the 
law  as  meaning  just  what  it  said;  that  is,  permitting  a  lower 
charge  for  the  longer  haul  where  it  could  be  demonstrated  that 
a  substantial  dissimilarity  of  circumstances  and  conditions 
existed. 

As  a  result  of  the  construction  of  the  law  adopted  in  Central 
Freight  Association  and  Trunk  Line  territory,  the  Chesapeake 
&  Ohio  Railway,  to  a  degree  parallel  with  the  Trunk  lines,  re- 
adjusted its  rates  so  that  on  shipments  from  the  West  no  point 
west  of  Norfolk  took  a  higher  rate  than  the  through  rate  to 
Norfolk,  the  rates  to  Norfolk  being  controlled  by  the  Chicago- 
New  York  rates.  The  Norfolk  &  Western  Railway,  to  a  large 
portion  of  its  line,  parallel  to  the  Chesapeake  &  Ohio,  adopted 
the  same  principle  of  rate  making.  This  gave  to  the  Virginia 
cities  very  low  rates  based  on  the  necessity  that  the  Chesapeake 
&  Ohio  and  Norfolk  &  Western  were  under  of  meeting  the  ex- 
port rates  to  Baltimore  and  other  North  Atlantic  ports,  and  on 
the  construction  of  the  4th  section  of  the  commerce  law  by  the 
Chesapeake  &  Ohio  Railway  and  Norfolk  &  Western  Railway. 

There  were  also  lines  from  the  West  which  are  now  em- 
braced in  the  Southern  Railway  system  and  its  connections 
which  competed,  not  only  for  export  business  by  way  of  Nor- 
folk, but  also  for  business  from  the  West  to  Lynchburg  and 
Richmond.  They  were  confronted  with  the  alternative  of 
either  going  out  of  this  business  or  accepting  it  at  the  same 
rates  charged  by  the  Chesapeake  &  Ohio  and  the  Norfolk  & 
Western.  As  these  rates  were  sufficient  to  pay  the  movement 
expense  on  the  traffic,  and  contributed  something  to  the  general 
expenses  and  fixed  charges,  they  decided  to  continue  to  com- 
pete for  this  traffic.  To  have  at  the  same  time  adopted  the 
Trunk  line  construction  of  the  long  and  short-haul  provision 
of  the  law  would,  however,  have  meant  bankruptcy.  Accord- 
ingly, on  the  theory  that  rates  to  the  Virginia  cities  were  fixed 
by  conditions  beyond  their  control,  and  that  the  circumstances 
and  conditions  under  which  the  service  was  performed  were 
substantially  dissimilar,  rates  from  the  West  to  intermediate 


12 

points  south  of  Lynchburg  remained  higher  than  rates  to 
Lynchburg,  being  based  on  the  sum  of  the  through  rate  to 
Lynchburg  and  the  rate  south  from  Lynchburg.  This  action,- 
which  was  subsequently  sustained  by  the  courts,  imposed  no 
injustice  on  the  points  South.  On  the  contrary,  they  received 
the  benefit  of  lower  rates  made  by  the  combination  with  the 
highly  competitive  Lynchburg  rate.  Thus  Lynchburg  is  used 
in  basing  through  rates  from  the  West  to  points  in  the  Caro- 
linas  as  far  South  as  the  South  Carolina-Georgia  State  line, 
where  the  combination  on  Atlanta  and  Augusta  begins  to  be 
the  determining  factor. 

In  considering  this  adjustment  the  fact  must  not  be  lost  sight 
of  that  points  in  the  Carolinas  to  the  south  of  Lynchburg  have 
two  alternative  routes  from  the  West,  one  by  way  of  Knox- 
ville  and  Asheville,  by  which  the  haul  to  Lynchburg  is  the 
longer  haul,  and  the  other  by  way  of  Lynchburg,  by  which  the 
haul  to  that  point  is  the  shorter.  It  is  evident,  therefore,  that 
the  long  and  short-haul  clause  could  not  be  operative  in  both 
directions,  and  that  over  one  route  the  charge  for  the  short 
haul  would  have  to  be  higher  than  that  for  the  long  haul,  un- 
less the  rates  from  the  West  to  points  south  of  Lynchburg  were 
made  same  as  to  Lynchburg.  The  Northern  routes  from  the 
West  to  Lynchburg  being  shorter  than  the  Southern  route,  it 
is  reasonable  that  the  points  south  of  Lynchburg  should  have 
higher  rates  than  those  of  Lynchburg.  The  only  alternative 
of  applying  the  Lynchburg  rates  to  the  points  south  of  that 
city  would  affect  such  a  large  volume  of  traffic  as  to  be  ruinous 
to  the  carrier  should  they  be  adopted.  Rates  to  points  south 
of  Lynchburg  are  reasonably  low.  In  fact,  they  have  the  ben- 
efit of  the  exceedingly  low  rates  made  to  Lynchburg  plus  the 
reasonably  low  rates  from  that  point.  This  adjustment  is  not 
only  made  inevitable  by  the  working  of  economic  forces,  but 
it  has  stood  the  test  of  litigation  and  has  the  approval  of  the 
courts.  It  is  also  interesting  to  note  that  while  originally 
State  Railroad  Commissions  in  Southern  States  did  not  adopt 
this  character  of  rate  adjustment,  at  least  one  State  Commis- 
sion has  recognized  the  necessity  of  it,  and  has  recently  under- 
taken to  establish  special  rates,  not  on  the  basis  of  distance,  as 


13 

formerly  used,  but  arbitrarily  making  lower  rates  to  more  dis- 
tant points  than  to  less  distant  and  intermediate  points. 

Similarly,  rates  from  New  Orleans  to  the  Virginia  cities  on 
what  are  known  as  Louisiana  products,  including  sugar,  rice, 
and  molasses,  are  lower  than  to  points  south  of  Lynchburg 
and  nearer  New  Orleans.  This  is  due  to  the  water  route  by 
the  gulf  and  ocean  to  Norfolk  and  Baltimore,  and  to  the  fact 
that  as  some  of  these  products  reach  the  Virginia  cities  inter- 
mediate to  the  ports  by  way  of  the  Western  routes,  (the  rates 
to  them  being  in  no  case  higher  than  the  rates  to  Norfolk),  if 
a  rail  route  from  the  South  to  the  Virginia  cities  is  to  partici- 
pate in  this  traffic,  it  must  accept  the  rates  at  which  it  can  move 
by  other  routes.  Here  again  there  is  no  unjust  discrimination 
against  the  points  south  of  Lynchburg,  for  they  have  the  ad- 
vantage of  the  combination  of  the  low  rates  to  Lynchburg,  with 
reasonable  rates  from  that  point.  As  to  this  traffic,  also,  the 
question  of  which  are  shorter-haul  points  depends  on  the  direc- 
tion in  which  it  moves,  and  measures  a  movement  to  the  points 
south  of  Lynchburg  not  only  by  the  direct  rail  route  from  New 
Orleans,  but  also  by  rail  from  Norfolk  and  by  water  and  rail 
from  Baltimore. 

The  operation  of  the  basing-point  system  may  be  further 
illustrated  by  cases  which  have  been  through  the  courts  and 
have  been  found  to  be  justified  by  competitive  conditions. 

One  of  the  most  recent  decisions  of  this  character  is  that 
in  what  may  be  called  the  LaGrange  case,  in  the  matter  of 
rates  from  New  Orleans  to  LaGrange,  Ga.  LaGrange  was, 
at  the  time  of  the  complaint,  reached  by  the  Atlanta  & 
West  Point  Railroad  and  the  Macon  &  Birmingham  Railway, 
being  71  miles  southwest  of  Atlanta,  38  miles  northeast  of 
Opelika,  and  105  miles  west  of  Macon.  I  have  previously 
shown  how  the  competition  of  water  and  rail  and  all-rail  routes 
control  the  rates  to  Atlanta,  but  the  same  conditions  do  not 
exist  to  the  same  extent  at  LaGrange.  It  was  not  an  established 
jobbing  point  before  the  construction  of  railroads,  it  is  not 
reached  by  water,  competition  is  less  forceful  and  marked  at 
that  point  than  at  Atlanta,  and  LaGrange's  demand  for  the 
same  rates  from  New  Orleans  as  from  New  Orleans  to  Atlanta 


14 

was  not  sustained  by  the  Supreme  Court  of  the  United  States. 
The  lower  rates  to  Atlanta,  however,  have  their  effect  upon 
the  rates  to  LaGrange,  which  would  be  higher  but  for  the 
combination  of  competitive  rates  to  Atlanta  and  locals  from 
that  point  back  to  LaGrange.  Illustrations  of  the  way  in 
which  geographical  conditions  and  competitive  forces  have  re- 
sulted in  the  development  of  basing  points  might  be  continued 
indefinitely,  and  in  every  case  we  would  find  that  they  have 
not  been  made  by  the  arbitrary  action  of  railway  managers. 

Assuming  that  it  would  be  in  the  power  of  the  railways 
to  abandon  this  system,  and  to  base  rates  on  distance  to  the 
extent  which  prevails  in  the  more  densely  populated  trunk 
line  territory,  the  question  arises  as  to  whether  it  would  be  to 
the  advantage  of  the  Southeastern  States  as  a  whole  to  do  so 
I  have  no  hesitation  in  answering  this  question  in  the  negative. 
The  effect  would  not  be  to  multiply  distributing  centers  in  the 
South,  but  to  curtail  the  volume  of  business  now  being  dis- 
tributed within  that  section.  The  merchant  in  the  small  town 
would  purchase  to  a  greater  extent  in  primary  markets.  Deal- 
ing at  points  further  from  home,  he  could  not  replenish  his 
stock  so  often,  and  would  have  to  invest  more  capital  in  goods, 
adjusting  his  prices  at  a  higher  level  to  earn  interest  on  his 
large  investment.  The  freight  charges  on  these  goods,  in  the 
aggregate,  would  not  be  materially  less. 

Thus  far  we  have  been  considering  the  freight  rate  structure 
of  the  Southern  States,  principally,  as  it  affects  shipments  from 
other  localities  for  consumption  in  the  South.  Of  more  eco- 
nomic importance,  however,  is  its  relation  to  shipments  of  the 
products  of  that  section  to  the  markets  of  the  world.  In  this 
relation  the  dominant  competitive  forces  which  control  are  the 
competition  of  rival  producing  localities  and  of  transportation 
lines  from  those  localities  to  common  markets,  and  of  rival 
markets.  The  rates  on  this  traffic  must  be  such  as  will  place 
the  products  of  Southern  farms,  forests,  mines,  factories,  in 
competitive  markets  on  the  most  favorable  terms  possible. 
They  are  of  far  greater  importance  to  the  section  as  a  whole 
and  to  its  individual  inhabitants  than  are  the  rates  on  the  prod- 
ucts of  other  localities  for  consumption  in  the  Southeast.     A 


15 

difference  of  five  cents  in  the  freight  on  the  clothes  that  he 
wears  is  of  small  importance  to  the  cotton  mill  employee  when 
compared  with  the  necessity  for  a  rate  that  will  give  the  mill 
an  outlet  for  its  product,  enabling  it  to  run  and  give  him 
employment.  In  like  manner  the  difference  of  a  few  cents  in 
the  freight  on  a  plow  is  of  much  less  importance  to  the  farmer 
than  the  rate  on  his  cotton  or  corn.  Even  the  merchant  has 
a  larger  interest  in  many  cases  in  these  outbound  rates  than  in 
the  rates  on  his  stock  of  goods,  for  the  volume  of  his  trade 
is  directly  dependent  upon  the  prosperity  of  the  community. 

The  necessity  for  placing  the  products  of  the  Southeast  in 
nearby  and  distant  markets  has  controlled  the  rates  at  which 
they  move.  On  cotton,  for  instance,  these  rates  are  such  as 
to  move  cotton  to  the  Southern  mill,  to  New  England,  or  to 
the  ports  for  export,  thus  permitting  competition  in  the  buying 
of  cotton.  On  cotton  goods  they  move  the  products  of  South- 
ern mills  to  the  ports,  not  only  of  the  Atlantic  but  of  the 
Pacific,  and  place  them  in  competition  with  New  England  and 
throughout  the  Western  States,  and  even  in  New  England. 
On  iron  and  steel  and  their  manufactures  they  enable  the  prod- 
ucts of  Southern  furnaces,  mills,  and  factories  to  be  sold  in 
competition  with  Pittsburg  and  other  iron  and  steel  centers. 
On  fruits  and  vegetables  they  are  so  low  as  to  permit  the  early 
products  of  Southern  orchards  and  gardens  to  move  even  to 
Canada.  So  we  might  go  through  the  list  of  Southern  prod- 
ucts and  show  that  the  railways  have  not  been  able  to  adjust 
their  charges  on  a  distance  basis  or  with  a  view  to  making 
each  rate  bear  its  full  proportion  of  all  railway  expenditures, 
but  have  been  compelled  to  accept  those  rates  that  would  move 
the  traffic  under  highly  competitive  trade  conditions. 

It  is  also  important  to  observe  that  the  competitive  rates  on 
the  products  of  the  South  apply  from  points  located  locally — 
that  is,  on  one  line  of  railway  as  well  as  from  points  located 
on  two  or  more  roads — it  being  a  recognized  necessity  that 
local  producing  points  must  be  given  rates  to  enable  them  to 
compete  with  points  producing  like  products,  whether  they  be 
local  stations  on  one  line  or  competitive  points  on  two  or  more 
lines. 


i6 

What  I  have  said  to  you  this  evening  can  hardly  be  termed 
a  history  of  the  construction  of  Freight  Rates  in  the  South, 
because  it  has  been  impossible  to  give  a  history  in  so  brief  a 
time,  but  I  have  outlined  the  principles  and  related  briefly  the 
conditions,  and  in  concluding  I  will  say  that,  as  in  all  other 
sections  and  in  all  other  lines  of  business,  the  charges  of  the 
railways  of  the  Southeastern  States  are  subject  to  the  laws  of 
economics,  and  such  peculiarities  as  exist  in  their  rate  adjust- 
ments have  not  been  made  arbitrarily,  but  are  the  inevitable 
result  of  geographical  and  economic  conditions. 


UNIVERSITY 

CF 


LIBRARY 

This  is  the  date  on  which  this 
book  was  charged  out. 


JUL  e.ww 


[30m-6,'ll] 


